IPO whales put on a show for investors

Commentary: Surging IPO market isn’t a fad this time

SAN FRANCISCO (MarketWatch) — You remember Shamu. She was the first whale to survive more than 13 months in captivity. And she starred in a killer whale show that put SeaWorld on the amusement park map.

Shamu died in 1971, but SeaWorld Entertainment Inc.
SEAS, +0.97%
continued to use her name and likeness to promote its whale shows.

Getty Images

An Orca performs at SeaWorld

And unlike other fish stories on Wall Street (most notably J.P. Morgan Chase & Co.’s
JPM, -0.51%
$6.2 billion “London whale” fiasco), the Shamu story has a happy ending. The company went public in March and the stock is up 30% from its $27 offering price.

The story of SeaWorld and Shamu isn’t too far from the narrative playing out on Wall Street lately. Both the company and the market for initial public offerings have floundered and batted around. There hasn’t been much traction since the wave of social network related IPOs that peaked with the Facebook Inc.
FB, +0.48%
IPO in May of last year.

But the first half of 2013 has been different. Not only has it been robust — 92 deals valued at a combined $20.6 billion in proceeds, according to Renaissance Capital — it has been marked by what analysts call the “lifeblood” of the U.S. IPO market: consumer, technology and health care offerings.

You could say that after a struggle, the market is swimming.

This is good news for investors since new-to-market companies are enjoying an average 21% gain over their offering price (better than the S&P 500’s
SPX, +0.35%
close to 3% gain during the second quarter).

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But it’s also good news for Wall Street because the second quarter was the fourth consecutive quarter in which IPOs produced an average double-digit percentage return. And because the quality of companies coming to market is higher. What’s more: trends suggest more are coming.

That means more high-margin fees for top underwriters including Goldman Sachs Group Inc.
GS, -0.29%
and Morgan Stanley
MS, +0.17%
and J.P. Morgan. Already they’ve produced a combined $1.84 billion in equity underwriting revenue through the first half of the year, according to preliminary results by Dealogic.

Two other trends suggest that the IPO revival is paying off for the financial industry.

First, private equity drove much of the overall deal volume. Buyout shops such as KKR & Co.
KKR, +2.91%
and Blackstone Group L.P.
BX, +0.97%
use IPOs to exit their investments. The cash they generate can be put into new buyouts. So, with 71% of deals coming from private equity in the second quarter, it’s clear the buyout machine is churning, according to PwC US.

Second, 48 of the 62 IPOs in the second quarter were considered “emerging growth” companies. And, the number of venture-backed IPO exits more than doubled in the second quarter to $2.2 billion from the same period last year. These companies, mostly start-ups that were financed early by venture capital funds, came mostly in the biotech industry.

And mostly they’ve been red hot. Chimerix Inc.
CMRX, +3.44%
is up 73.1% since its April 10 debut. Insys Thereapeutics Inc.
INSY, +2.12%
is up 73% since it’s May 2 launch and Epizyme Inc.
EPZM, +2.78%
which came to market at the end of May is up 87.5%.

There have been some exceptions including BioAmber Inc.
BIOA, -3.12%
which is down 32%. But for the most part the IPOs introduced in what has been a relatively bullish, but volatile, market have performed well.

In all, the second quarter was the best quarter for U.S. IPOs in terms of fundraising since the end of 2007 and the most active period for deals since 2000, according to Renaissance.

Simply put, the U.S. IPO market, which gauges not only the innovation and dynamic output of the national economy but the ability of the financial markets to fund them, is roaring.

It even liberated SeaWorld, a company that was founded nearly 50 years ago and went through multiple owners — usually companies that weren’t a good fit — to private equity ownership in Blackstone.

In the end, the finally blossoming IPO market is a lot like Shamu’s story. After a rough time when it didn’t look like either the whale or the market for newly minted public companies would make it, they thrived.

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